Short-termism reigns for Sterling

This time last week traders were “looking-forward” with some trepidation to the release of Q2 GDP data for the UK. Their worst fears were realized as the UK economy shrunk by 0.2% and the predictions of a Brexit driven recession were in full swing.

Sterling fell to a low of 1.2015 early on Monday morning in Asia and it was seemingly only a matter of time before the 1.2000 level was broken.

A new week brought new economic data and last week’s calls for a recession have been conveniently put to one side. First, employment, then inflation, and finally, retail sales, brought some long-awaited cheer to the market. Even the long-running weekly downtrend for the pound versus the euro looks like ending.

Sterling has finished every week since May 10th lower versus the single currency, but yesterday’s close at 1.0881 meant that that run is virtually certain to come to an end.

There has been one other factor which has “lit a fire” under the pound, and that is the coup planned by the Labour Opposition, whereby they win a vote of no-confidence in Boris Johnson and insert an interim Government which vows to hold a second Brexit referendum before holding a General Election.

There is one proviso. Jeremy Corbyn, the Labour Leader, will table a vote of no-confidence “as soon as he feels he can win”. Can he “feel he can win” before October 31st? That remains to be seen.

The market may not like the thought of a Labour Government, which is traditionally bad news for the City, but it likes no-deal even less. Well, as far as Sterling is concerned anyway.

The move higher for the pound driven by three positive pieces of data may be proved to be more than a little short-sighted. The Employment data is not in the least reliable, inflation is rising due to the fall in the value of the pound since Johnson’s election, and retail sales are higher due to just about every shop on the High Street discounting every product they sell given the parlous state of the bricks and mortar retail sector.

At some point this will all become obvious and normal service will be resumed.

Yesterday, the pound traded up to a high of 1.2151, closing at 1.2085.

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Is the U.S. bucking the trend?

There is one reliable feature of economic cycles, particularly in the United States. That is that they are unreliable. The reason for that is that there is always something bubbling underneath the market or behind the scenes at some investment bank which is likely to upset any semblance of equilibrium. Take Subprime, Dotcom or LTCM, now just names in economics textbooks; they caused the end of periods of growth in the U.S. economy.

While there is nothing coming to light right now that could bring about a recession in the U.S, there are a few candidates.

There is a lot of talk about the slowdown in global trade. That is being caused virtually single-handedly by the Trump administration and their concerns that China is gaining on the U.S. They are catching up far faster than had been estimated in just about every measure of growth, prosperity, and influence.

There has long been bluster from the U.S. Treasury regarding China’s manipulation of its currency. This was treated in abstract by the market as it was accepted that while China played “fast and loose” with its currency, it continued to finance America’s burgeoning trade deficit.

Businessman Trump, as opposed to President (or Politician) Trump, saw the opportunity to deflect any issues he had at home with the economy by doing two things: He cut taxes and promised they would be paid for during the term of his Presidency (they can’t) and he decided to make Chinese imports more expensive, not to make U.S. firms able to sell their own goods in their home country but to make Beijing relax regulation on its own imports of U.S. made goods. Again, that tactic is failing and is possibly going to bring down the entire global economy.

So, to Subprime, Dotcom and LTCM will the Trump name be added? It is hard to say but analysts are beginning to see the dark clouds of recession forming and it may be Trump’s re-election plans that are hurt the most.

Yesterday, the dollar index continued its short-term rally, reaching a high of 98.24, closing at 98.15.

Eurozone banks continue to lose value

Some interesting facts about Eurozone banks emerged yesterday that underline the depth of the crisis the region still faces.

In 2007, Eurozone banks were worth a total of $1.7 trillion, which was a little more (like for like) than U.S. banks. Today, banks in the U.S. are worth about three times more than banks in the Eurozone (still like for like)
In total, Eurozone banks are worth about half what Microsoft is worth. But of course, Microsoft isn’t carrying bad loans on its balance sheet the way Eurozone banks are.

There is always talk of “bad banks” being created by the ECB to hold all the bad loans Unfortunately, they are having trouble finding a “good bank” to carry on lending to genuine customers!

There is little doubt that the Eurozone is about to fall into recession, and it is also fair to say that that recession is not all its own making. However, it is also fair to say that Mario Draghi was prepared to look the other way as banks capital had been eroded to such a serious extent by the level of bad loans which no one was able to find a solution for.

In the pre-euro days, Italy, Spain, Greece, Cyprus, and Ireland would have had a solution. They would have defaulted, devalued and been “back in the game” by now. Unfortunately, financial discipline, Frankfurt style, precluded them and as the economy slows, they are left having made no improvement in the state of their economies over ten painful years.

Yesterday, the euro fell to a low of 1.1091 and closed at 1.1107.